Learn how to boost your credit rating

Whether you left school before Eisenhower became president or received your diploma yesterday, you're always being graded on how you handle credit. What's more, the score you get--a number ranging from 300 to 850--is no trifling matter. That number (known as the Fair Isaac Corporation or FICO score, named for the analytical company that devised it) determines the rates you get on your mortgage and car loans, even whether you are approved for a new apartment.

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For instance, say a score of 650 gets you a mortgage rate of about 7.9 percent. Boost your score to 750 and you could qualify for an interest rate that's 1 or even 2 percentage points lower, saving thousands over the life of a 30-year, fixed-rate loan. That's enough to make even a back-of-the-class slacker pay attention. Yet many consumers don't know their score. And some people--particularly older women--don't even have a FICO score, typically because their mortgage and credit cards are in the name of their spouses.

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"But all marriages end, even the happy ones," points out Ginita Wall, director of the Women's Institute for Financial Education (www.wife.org) and coauthor of It's More Than Money, It's Your Life. "And if a woman does not have credit in her name, she is going to have problems." For instance, if she wants to start a business later in life or simply open a department store charge account, she needs to show that she handles credit well. Without a good FICO score, lenders tend to be skittish about extending credit.

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It is relatively easy to establish a credit history, but difficult to fix your record if you've mismanaged credit in the past. Still, making the right moves boosts that credit score.

FIND OUT YOUR STANDING
A law passed last year requires credit bureaus to provide consumers with a free annual credit report. However, the law is being implemented differently from state to state and it will take all of 2005 before every state will be able to offer free reports to residents (check www.ftc.gov for updates).

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In the meantime, anyone can still get a credit report, but you'll have to pay for it. You can buy those reports--although not your FICO score--from the three major credit bureaus: Experian (www.experian.com; 888/397-3742); TransUnion (www.transunion.com; 800/916-8800); and Equifax (www.equifax.com; 800/685-1111).

Fair Isaac offers all three reports plus your FICO score (www.myfico.com). Costs vary, as does the amount of information each report provides, but any one report should give a good bird's-eye view of your credit.

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However, to get the most comprehensive overview of your credit, it's a good idea to invest in all three reports. That's because some creditors may report to one bureau but not another. Or, if those creditors report to every bureau, they may do so at different times of the month. So your scores with each bureau will differ slightly.

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"Generally, if your score is 680 or higher, you can apply for credit with confidence," says Stephen Snyder, financial expert and author of Do You Make These 38 Mistakes With Your Credit?

IMPROVING YOUR GRADE
Now that you have what is essentially your credit-management report card, look for ways to boost your grade. Make sure that the information in the report is accurate. Do you recognize all of the accounts listed? Sometimes information from someone with a similar name may end up in your file. For instance, Robert Downey may find accounts on his report that belong to Robert Downey, Jr. If you've ever had your wallet stolen, pay extra attention. "Smart identity thieves will open an account in your name and pay on it reliably before they start using it fraudulently," says Craig Watts, public affairs manager for the Fair Isaac Corporation. If you see an unfamiliar account, call the creditor right away.

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If you're in a dispute over a charge, bear in mind that it may show up on your report as being paid late or not at all, a factor that can damage your FICO score. For instance, Wall once had problems getting a mortgage because she was disputing a charge for returned merchandise.

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Next, check to see if your report contains four two-digit codes. These "reason codes" explain why your score isn't higher, says Snyder. For example, you may need to improve your mix of credit by adding a major credit card to a file containing mainly department store cards. Perhaps you are maxing out your limits. "If you have $10,000 in credit and are using $9,000, you can improve your score by paying down your debt," says Watts. Sometimes you have to let time pass for your score to improve. Mistakes such as paying late stay on your report for seven years. "But the older the information, generally the less damaging it is," says Gerri Detweiler, author of The Ultimate credit Handbook: How to Cut Your Debt and Have a Lifetime of Great Credit.

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If you're in serious trouble--with bankruptcy, a tax lien, or judgment--you can write a 100-word statement that the credit bureaus will include in the report. "You can say, "I was going through a divorce and my ex was supposed to pay the bills but did not,'" says Wall. Snyder feels lenders rarely if ever give such statements the consideration they deserve anymore, but it certainly can't hurt to try.

Divorce, incidentally, is one the biggest causes of credit problems. A judge may state that your ex-spouse is responsible for half of the Visa bill, but if your name is on the account, beware.

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"You still have a contract with the creditor and the divorce decree has nothing to do with that," warns Maxine Sweet, vice president of consumer education for Experian. If you can't pay off all joint accounts immediately, Sweet's advice is for both parties to take out personal consolidation loans to pay off debts. "That totally breaks your tie to your ex," she explains.

IF YOU HAVE NO CREDIT
If your credit history is a blank slate, getting credit immediately may take time. On the plus side, at least you're starting with a clean record and can begin building a history tight away. Open a credit account (department store cards are generally easy to get) and keep it active for six months and one day--the length of time needed to generate a FICO score, of course, you don't have to wait that long if you are married and can become a joint cardholder on your spouse's account. Such piggybacking instantly taps into your spouse's entire credit history--a smart move if it's a stellar record.

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As you build a history, keep in mind that revolving credit--such as Visa and MasterCard--counts more toward a score than installment loans such as mortgages, which have a fixed monthly payment. "With a credit card, you determine how much of your credit limit you will charge and whether you will pay the minimum or the amount in full," says Sweet. In short, it provides a better snapshot of how you handle money.

If you have trouble getting a card, a secured card may be an excellent choice. As its name suggests, you secure your credit with your own savings. For instance, if you stash $100 in savings with the lending institution, you can borrow up to $100. Tuck away $1,000 and the limit jumps that much.

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One caution: Even though your balance is guaranteed by the deposit, you will still be charged a fee if you're late or skip a payment. Treat it like a regular credit card; pay on time.

Once you've held a secured card for six months, apply for a regular credit or department store card. Whatever you do, don't apply for too many cards at once. It just makes it harder to get a card at all.

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"Whenever you apply for credit, you give the lender permission to look at your report," explains Snyder. "Each inquiry, each time someone looks at your report, it lowers your score." That's because the more inquiries your report shows, the more you've been applying for credit. Watts says people who apply for credit frequently are a statistically higher risk, so even just a simple inquiry can be damaging. To keep inquiries from affecting your score, open new credit accounts only when you really need them. Try not to take advantage of some minor incentive, such as a free toaster or getting a 10-percent discount on any purchases you make that day. Focus on your long-term goal and don't let those minor distractions become obstacles to your goal.

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Finally, keep your credit score high by paying on time. "That is absolutely the most critical thing," says Sweet. As with school, tardy students rarely make the grade.

Student Loans - Easing the burden

Get a break on your payments so you can manage your other debt, too.

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It's payback time for students who graduated from college last spring owing money on federal student loans. Your six-month-long grace period is about to end, and the money you owe--an average of $16,600 for undergraduates 18 to 25, according to Nellie Mae, a major student-loan provider--is looming large. The burden is still heavier when you add on credit card debt, which Nellie Mae says averages $2,000 for the same group of students, and maybe even payments you're making on a new car. What's the best way to balance the load?

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Rebecca Carter has a plan. Carter, 31, is a veteran of student loans, having repaid about $7,500 from her first stab at college a decade ago. Two years ago she returned to school to complete her degree in business administration at Eastern Nazarene College, in Quincy, Mass.; she graduated in August with $23,000 in outstanding loans.

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Carter is wiser, if not richer, the second time around. Before she begins repayment next March, Carter plans to consolidate loans from three lenders (with interest averaging about 7.5%) into a new loan from a single lender, and to extend the payment term from the standard ten years to 20 years. Carter estimates that loan consolidation will reduce her monthly payments 40%, so that she'll pay between $200 and $250 a month. That will give her breathing room to make payments on her more-expensive car loan at 11%.

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Once the car is paid off, she hopes to put the extra money toward the student loans and still repay them in ten years. "I understand debt a lot better this time around because I've lived it," says Carter, who is also a manager of loan origination at Nellie Mae.

A WINNING STRATEGY. Carter's plan to knock off her more-expensive loan first and then concentrate her resources on her remaining debt is a winner, says Amy Cole, an educator at the Consumer Credit Counseling Service of Southern New England. A credit card charging 18% interest is a heavier burden than a student loan: The highest rate on student loans currently outstanding is 8.25%. If student loans are your only liability, focus first on those with the highest rate. Even if your budget is tight, don't rule out investing some of your resources if you can earn a higher return than the interest rate you're paying on your loan.

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The standard repayment plan for student loans calls for equal monthly payments and a ten-year payback period. If that's more than you can afford, call your lender before the grace period ends to ask about other repayment options. For example, Carter is a prime candidate for loan consolidation because she owes money to three different lenders at different rates. With the consolidated loan, the interest rate will be a weighted average of all the loans, rounded up by one-fourth of a percentage point. Variable rates for government-sponsored Stafford loans are unusually low now, so consolidating locks in an attractive rate. Once you're locked in, however, you're stuck if the Stafford rate happens to drop in the future.

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When consolidating loans, start with your current lender, advises Robin Leonard, author of Take Control of Your Student Loan Debt (Nolo.com, $19.95; 800-992-6656), and shop elsewhere if you don't like the terms. The U.S. Department of Education, for example, is offering an interest-rate reduction of 0.6 percentage point for borrowers who consolidate before starting repayment. Most lenders will also reduce the interest rate if you pay electronically, with a further reduction of two percentage points once you make 48 consecutive on-time payments.

OTHER TACTICS. If a loan consolidation doesn't suit your needs, consider a graduated repayment plan, which starts out with monthly payments that are about 50% of those under a standard plan. Payments will gradually increase until you're paying more each month than you would under a standard plan: While the higher payments may be manageable if you expect your salary to keep pace, there's a chance you'll have difficulty qualifying for another loan, such as a mortgage, later on. And you do end up paying more in interest, especially if you take more than ten years to repay. "Once you lower the payment or increase the term, a $25,000 loan can end up costing $40,000," says Diane Saunders of Nellie Mae.

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If your finances are too shaky to manage either a standard or a graduated plan, some lenders will extend your repayment period up to 30 years, with monthly payments as low as $50. You can also choose an extended repayment plan that fluctuates with your income; monthly payments are calculated each year based on annual income for the previous year or on current monthly pay stubs.

Beware of letting payments drop too low, or you may find yourself paying interest only and never tackling the principal, warns Patricia Scherschel of the USA Group, which services student loans. But because you are entitled to switch plans at least once a year, a repayment option that increases the cost of your loan needn't be permanent. "As soon as you get promoted or earn more, you should send in more money or switch to a standard plan," advises Michael Kidwell of Debt Counselors of America.

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If you return to school, you can request a deferment, which lets you suspend payment until you complete your studies. If you are unemployed or are temporarily disabled, you can defer for up to three years; the government will continue to pay the interest on your subsidized loans.

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If you can prove financial hardship for some other reason, you can apply for forbearance. That has the same grace period as deferment, although interest continues to accrue even on subsidized loans. Forbearance should be a last resort, because when you finally pay back the loan, "you're going to be making a payment that is even higher than the one you were uncomfortable making the year before," says Scherschel.

Why credit card financing must be considered carefully

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Credit cards offer perhaps the most tempting form of debt available, particularly after your loan applications have been turned down by half a dozen banks. The interest on the balances, however, nearly always cancels out the income the funds produce. Whether the card is used to fund the company's opening, an expansion, or an individual client's project, the interest on the balance averages around 17 percent per year on new purchases and as high as 25 percent on cash advances, according to DCA statistics. Most often, says accountant Ed Slott, the optimistic small-business owner will take on credit-card debt hoping to pay off the balance in two or three months, once he or she generates enough sales. But if the sales don't come in as high as projected, the owner is lured into taking on more debt to pay off the old. "And that can be the beginning of the end."

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As an alternative, talk with your banker about a loan or a line of credit that's guaranteed by the Small Business Administration (SBA). About 30 percent of SBA-guaranteed term loans -- offered for periods of up to 10 years -- are given to start-up companies that can demonstrate a good credit history and a decent cash-flow forecast. These loans are best for longer-term needs; if, for example, you are manufacturing a product that won't get to market for two years or you have to line up subcontractors, which could take time, you may need a loan to cover yourself while receivables are few. Lines of credit -- which the SBA offers through banks at rates of around prime plus two -- are best used for short-term working capital or to weather a temporary slump.

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To determine which is better, a loan or a line of credit, you'll have to get a good handle on your business cycle. Those entering seasonal businesses, for example, should know when to expect a windfall and when things will be tight, and they should manage cash flow accordingly. Here is where your business plan -- a necessary document if you hope to have any chance of receiving a loan -- will support your rationale for your requesting cash.

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If you have a temporary but immediate need for equipment or supplies, try getting materials on credit. You can often get a 30- to 60-day extension on payment; and if the companies do charge interest, you can be sure it will be less than what your credit-card issuer charges.

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Should your business experience a downturn, think about expanding your product line rather than trying to skate by through assuming additional debt. Ask your existing client base what else they might buy from you if you offered it. "Most people are not tapping all the ways to sell parts of themselves," says Slott, who supplements his own accounting business with a newsletter about IRAs. "Anthony Robbins says that success comes from two things: inspiration and desperation. And that's true; that's when you either get creative or you die."

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Debt Offensive - Managing Loans and Debts

Feel as if you're living on borrowed time? Take control of your business loans before you get burned

YOU'RE RUNNING through a forest, darting feverishly around low-hanging branches. They're right behind you. It's the posse of loan officers from your bank.

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Does this sort of 3 A.M. nightmare seem familiar? If it does, you need a better strategy for managing your debt. While borrowing may be the ticket to fast growth for your business, it can also keep you tossing and turning at night if you're struggling to make payments on the principal. The time for developing your debt-management strategy, most experts agree, is before you borrow. Ask yourself the following questions before you assume any debt. If your answers jibe with our experts' advice, you'll sleep soundly.

EXACTLY HOW WILL THE BORROWED FUNDS HELP ME MAKE MORE MONEY?
Be sure they will pay for something that will directly benefit your bottom line. "It's very tough for small-business owners to separate needs from wants," says Ed Slott, principal of accounting firm E. Slott & Co. and author of Your Tax Questions Answered 1998 (Plymouth Press, 1998). "If you're borrowing because you'd like a nice office chair or a $10,000 desk, you're borrowing for the wrong reasons, because none of that is going to create income."

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On the other hand, borrowing to increase your employees' level of efficiency is certainly justifiable, as long as the return on the investment is expected to be higher than the cost of the debt. If you're looking at investing in computer-networking technology, for example, so that employees can share information, figure out how much the absence of the technology costs in terms of lost time and inefficiency, suggests Alice Bredin, author, consultant, and small-business adviser on the American Express Small Business Exchange. Base this calculation on hourly salaries. Next, estimate the revenue that could be generated in the amount of time that you're losing because of inefficient operations.

Todd Hendricks, cofounder and general partner of Franconia, Pa.-based T. H. Properties, borrows a considerable sum -- between $4 million and $8 million -- every four to six weeks to pay for the lots on which his company builds new homes as well as for the actual construction costs. But these loans, taken for about 18 months, are kept completely separate from other lines of credit put toward other internal costs, such as the purchase of supplies. And he borrows money for a new project only when he is 99 percent certain that the house will be sold at the planned price. "We want to see a return on our equity, and that's the bottom line," he says.

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WILL IT HURT THE BUSINESS IF I DON'T PUT MONEY INTO IT?
If investing in a project won't result directly in additional sales or revenue, you can still justify borrowing the funds if the company's image is at stake. "If your competitors are all offering 24-hour turnarounds, or everyone's offering Saturday and Sunday service but you won't be able to do it unless you have an infusion of capital," says Bredin, then the debt is justified. Or, if all your clients are asking for your Web-site address, you may have to create a site to maintain credibility and market share.

IS MY INCOME STREAM STEADY?
If your cash flow has suddenly become unpredictable -- if you lose a major client or your industry hits a recession -- and you're not certain you'll have the money to continue paying back the debt, then it's a bad time to borrow, says Bredin. Granted, the cash infusion will look very appealing, but you must resist the lure of such "easy money," notes Slott. "When you have bills to pay, when people are calling you up complaining, it's very hard to stay disciplined." And if you do try for a loan while you're in a panic, you won't have the time to negotiate the deal that's best for your needs.

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HAVE I TRIED OTHER AVENUES?
Consider carefully whether you might be able to avoid borrowing by cranking up sales activity, suggests Bredin. If you're selling big-ticket items, one extra sale may make the difference. Also, find out whether your receivables are up-to-date. If they aren't, there is certainly no reason for you to go into hock just because your customers haven't managed their accounts well. "Don't be afraid to be a nag," says Steve Rhode, president and cofounder of Rockville, Md.-based Debt Counselors of America (DCA). "If I were a small-business owner, I would hate to lose my business because I was too chicken to ask for the money."

And even if you have a sound reason for taking on debt, borrowing isn't without risks. If the interest you're paying is adding up more quickly than your revenue, get help fast. First, notify your banker, says Scott Harvey, VP and manager of the Small Business Administration loan department at Port Orchard, Wash.-based Kitsep Bank: "Be honest. Don't say what you think the banker wants to hear, because if you can't deliver and you break a promise, the chances of your getting any help at all are significantly diminished."

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Another option is to contact Debt Counselors of America (800-680-3328), where a counselor will work with your creditors to create a more realistic payment plan and to reduce, if not eliminate, the interest. "Don't borrow any more money. You can't borrow your way out of debt," says Rhode. When is it a good time to ask for help? "I would say the first time you find that you're waiting until you have the money in the bank to send a check. That's a tip-off," he says.
To help you further in managing your debt, DCA will also advise you about where you could be saving more money and where you might be cutting back too much. "The worst thing you can do is get tight and just decide to cut back on advertising, for example," says Rhode. "If you don't advertise, you won't make any sales; if you don't make sales, you won't have a business."

Automobile Buyers With Credit Problems

Are you getting your share of potentially profitable subprime market?

How do you handle the "unbankable customer" in your dealership? Are you recognizing your share of this potentially profitable market? What opportunity does this segment of the business present? How is the market changing? Where is the market headed over the next 12 to 18 months? Let's look at industry trends within the nonprime/subprime/buy here-pay here segment of the automobile market.

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First of all let's define the market of which we speak. We have adopted the term "unbankable customer" for any consumer that visits your dealership and does not qualify for a conventional lending program. For some of you, this may be 30% or more of your dealership traffic. The real question is how do you serve this segment of the market?

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Many of you may remember the wonder years of 1996 to 1998. There were subprime lenders a plenty. Special finance departments were getting customers approved through subprime lenders that were previously turned down with no conditions or chance for approval. Buy here-pay here dealers were feeling down and out because much of the business was being placed with national lenders. Dealers were recognizing significant increases in profits by serving the subprime segment of the market. Then everything changed.

The state of this segment of the market today is quite different. During the past 12 months we have witnessed what many believe is the final shake-out of the subprime lenders. There has been a great deal of consolidation and we can count at least 20 bankruptcies or closures among the lenders serving this segment of the market from 1995 to 1998. The good news is that those left standing appear to have weathered the storm and have solid business models and understand their niche.

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As a result, the buy here-pay here market is a booming! We have noticed a dramatic increase in the number of dealers entering the buy here-pay here business. It is almost like the '80s all over again. Many dealers have enjoyed a successful run and have capital to invest into new opportunities. Each month we help new dealers evaluate the buy here-pay here business and determine if there is an opportunity for their dealership. What is driving this market?

As more and more subprime lenders tighten their credit underwriting policies potential buyers are left with no other alternative but to return to the buy here-pay here operation. We have four 20 Groups that are devoted to buy here-pay here and the retail sales of these dealers as a group are up over 18% from last year. We expect this growth curve to continue.

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What is appealing about the buy here-pay here business is that when run properly the return on investment is at least 60% per year. That is to say if you invest $500,000 in a buy here-pay here start up you should expect a return of $300,000 of net profit pre-tax after losses each year. Not a bad opportunity. The trick is having the discipline to operate in that segment of the market.

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We believe that growth rate of the unbankable customer segment of the automobile market will accelerate during the next 12 months. Much of this is driven by two key factors. First, we are in a period where major corporations are laying off workers by the thousands. This creates more unbankable consumers. Secondly, bankruptcy rates are at an all time high. After a bankruptcy filing consumers are typically left with special finance or buy here-pay here alternatives when it comes to auto financing. So if you are considering increasing your efforts to profit from this segment of the market your timing couldn't be better.

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Credit Card Firms Socking Users With Painful Penalties

NEXT time you get a credit-card bill, take a look at the interest rate charged on your unpaid balances. I'll wager it's higher than you thought.

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You may even be paying "penalty rates" that have recently topped 30 percent.
Interest rates on most credit cards have been going up. They're usually pegged to the bank prime lending rate, which is the benchmark for pricing loans. The prime rate has risen to 9.5 percent, up 1.75 percentage points in the past 19 months. Your credit cards probably charge the prime rate plus a fixed premium -- for example, prime plus 8 percent. Combining the two would give you a credit-card rate of 17.5 percent today.

Many banks change their credit-card rates quarterly. The prime rose 0.5 percentage point in May, so July may be the first time you see that increase on your bill.

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But small rate increases are only for good boys and girls. If you've been bad -- say, paid your bill late -- the bank may cancel your old rate and slap you with a higher, penalty rate.
The new rate applies not just to your new debt but also to the debt you already have.
The highest punitive rates I've seen, so far, come from Direct Merchants Bank in Scottsdale, Ariz.: 32.49 percent on a Gold Mastercard and 33.49 percent on a Web Miles Mastercard.

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It's socked to people who've made three late payments within a six-month period, or are more than 60 days late on a single bill. For two late payments, your rate goes to 29.49 percent. At Associates National Bank in Irving, Texas, punitive rates range up to 30.99 percent.

You're stuck with these rates for a while, unless you can switch the debt to another card -- most likely, a card you already own. It's hard to get a good, new card with "slow pay" on your record.

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Direct Merchants spokesman Mike Smith says that only a small percentage of cardholders are paying punitive rates. After making six on-time payments, your rate can drop by 1 percentage point. It takes years to work down to a decent rate.

Most of the top card issuers levy punitive rates today, says Robert McKinley, head of CardWeb.com, which tracks credit-card offers. Citibank, Wachovia and American Express Optima charge up to 24.49 percent. Chase charges up to 25.49 percent, CardWeb reports.

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As a concept, punitive rates have been around for a while. But this is the first time they've gone so high, McKinley says. Also, many more banks are assessing punitive rates, and for more infractions, than was common a few years ago.

Typically, you're hit with a penalty rate if you make one or two payments late or go over your credit limit.

But here's a surprise: You might also be punished if you've always paid on time. Some banks check your credit report to see if you paid any other card late. If so, you're rated a higher risk and your interest rate goes up.

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A payment is officially late even if you sent it on time but it got held up in the mail. To keep this from happening, smarties pay their bills early.

"The banks are playing hardball with consumers," says Pete Hisey, editor of Credit Card News in Chicago. In the old days, the top punitive rate was just a few points higher than regular rates. Now, the difference is large.

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Some cards that charge a fixed 12.99 percent jump to 23.9 percent, if your payment is late twice in a 12-month period.

If you're late on one payment, you might also lose the low, introductory rate you received when you opened the account.

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Late and over-limit fees may be added to these high rates.
You used to be able to get a late fee voided, if you called and threatened to cancel the card, Hisey says. Now the bank rep will instantly check your record, to see how profitable it is. Low-profit customers don't get any breaks.

Your bank doesn't send you a special notice if it starts charging a punitive rate. You were warned when you first applied for the card.
Hmmmm. Did you miss it?

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Punitive rates are disclosed in a box on the application, but the box might be scrunched on the back, in a sea of fine print.

The Federal Reserve, which regulates credit offerings, is proposing to make the box (and credit terms) more obvious. Still, it's up to you to check.

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